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From Exhibit 4 and the narrative in the introduction and concluding paragraphs of the case, it is evident that Marilyn simply records her revenues and expenses in a given year and evaluates these as her profit or loss for the year. This approach fails to capture the significant build-up in inventory that occurred during the year 2000 and fails to capture the significant level of product samples that Marilyn gives out as part of her marketing promotional expenses. Note also that the financials do not include any allowance for paying interest on the personal loan that Marilyn provided to the company or for paying Marilyn or her husband any salary for the packaging and labeling work that they perform. At the end of the case, it mentions that Marilyn has employed the help of a friend to examine her financial records, but she has yet to hire an accountant to organize her record keeping and preparation of financial reports.

Additional insight can be obtained from the approximate (unedited) income statement in Exhibit 5. This income statement is derived from the summary of financial information provided in Exhibit 4. Exhibit 5 breaks down revenue by source and identifies both the fixed and variable costs of operations. The results of Exhibit 5 suggest that on a sales volume of $30,000 the firm loses approximately $6,175 before taxes. In terms of actual cash outlays to meet all expenses, Exhibits 4 and 5 suggest that Marilyn’s loan to the firm partially compensated for the operating loss ($6,175) and the $16,848 build up of inventory (approximately $23,043 in negative cash flow).

The instructor is encouraged to bring up the idea of breakeven revenue and, depending on the experience and sophistication of the class, either lead the students through the computation or assign the calculation as homework or as an in-class exercise. TN-1, “Breakeven Sales Analysis,” provides an example breakeven analysis based on information given in Exhibits 4 and 5. The computations in TN-1...